Australia is likely to maintain its recent spurt of hiring, aided by weak wage growth that’s containing inflation and provides scope to cut interest rates further, the Reserve Bank said.
“Leading indicators of employment had increased further and were consistent with employment growth in the months ahead,” it said Tuesday in minutes of its March 1 policy meeting when rates were held at a record-low 2 percent. “Members observed that ongoing low wage growth was consistent with there being some spare capacity in the labor market.”
RBA Governor Glenn Stevens is assessing fallout from a darker global outlook — including wobbles in China — against a local economy showing “reasonable prospects for continued growth” after a record quarterly jobs gain. This month’s meeting was held a day before data showed the economy grew a strong 3 percent in the fourth quarter from a year earlier.
The minutes showed the board spent part of the meeting discussing China’s “longer-run economic performance and risks to growth” in Australia’s biggest trading partner. It noted that demographic changes and strong productivity growth that had been key drivers of Chinese growth were reversing and were likely to weigh on future expansion.
The RBA ran through the repercussions of China’s reliance on heavy investment and risks to the financial sector from large-scale lending against that country’s low level of foreign currency debt compared with other emerging economies.
“While the overhang of residential housing inventory and excess capacity in the industrial sector would affect demand for Australia’s resource exports and their prices, the scope for Chinese household incomes to rise over time created long-run potential for Australia to increase exports of rural produce and services, including tourism, to China,” the RBA said.
Australia is grappling with a decline in mining investment that had helped to underpin growth during a commodity price boom. The central bank cut rates in an easing cycle that began in late 2011 and the currency has fallen more than 25 percent from parity with the U.S. dollar since 2013, helping ease the economy’s transition.
The Aussie dollar was little changed immediately after the release of the minutes before falling to 74.90 U.S. cents at 12:16 p.m. in Sydney.
Yet the currency has jumped about 9 percent in the past two months as the global economy grappled with crosscurrents from policy moves — Japan and Europe’s negative rates versus the U.S. tightening in December.
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Reflecting on the market volatility after the Bank of Japan’s move in particular, the RBA said that “generally there appeared to be more uncertainty about the direction and potency of monetary policy in the major jurisdictions.”
Traders are gaining confidence that Stevens won’t lower rates again before his 10 years at the helm of the RBA end in September. They’ve unwound bets in recent days, with just 13 basis points of cuts priced in for the next six months as of Monday 5 p.m. in Sydney, compared with 28 basis points of cuts as recently as March 9.
The RBA reiterated its statement that it was appropriate to leave the cash rate unchanged at an accommodative setting.
“Over the period ahead, new information should allow the board to assess whether the improvement in labor market conditions was continuing and whether the recent financial turbulence presaged weaker global and domestic demand,” it said. “Members noted that continued low inflation would provide scope to ease monetary policy further, should that be appropriate to lend support to demand.”
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